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Centamin sentiment sours

Shares in the Egyptian gold miner dropped as much as a quarter this week, on a disappointing production update
May 30, 2018

Mining investors fear sudden revisions to commodity price forecasts. But such swings are arguably less worrisome than sudden downward revisions to output forecasts, as Centamin (CEY) has just found to its cost. Shares in the Egyptian gold miner were marked down by as much as a quarter this week, after it said low grades from open-pit operations at its Sukari mine were “persisting”, and that underground production is 10 per cent below forecasts.

IC TIP: Buy at 126p

While open-pit grades are forecast to increase in the second half of 2018, the causes of the underground output slump were a lack of available production equipment, and a lower-than-budgeted development grade. Consequently, Sukari’s full-year production guidance range has been downgraded to 505,000 and 515,000 ounces, a fall of as much as 13 per cent from an initial 580,000-ounce target.

Just as bad, investors have been warned that all-in sustaining costs could climb to $875-$890 (£658-£669) an ounce, a rise of up to 16 per cent on the $770-an-ounce guidance issued as recently as 3 May.

That’s a dramatic move of the goalposts, in just three weeks. However, with Sukari now operating in line with expectations, analysts at Numis upgraded the stock to a ‘buy’ rating, arguing the sell-off in the shares to 126p now undervalues both a “world-class mine” in Sukari and the $426m of cash and liquid assets on Centamin’s balance sheet at the end of March. Non-executive director Mark Bankes agreed with that verdict, shelling out for 40,000 shares at 130.4p a pop on Tuesday, the first trading day following the drop in the share price.

Still, investors have been here before. In the first half of 2017, the strip ratio (that is, the handling of waste rock) increased along with lower grades from both the open-pit and underground mines. That, in turn, left the gold miner behind on its production rate and pushed first-half all-in sustaining costs to $856 an ounce, some 23 per cent ahead of the 2016 average, and 8 per cent ahead of 2017 targets.